Deck 7: Property Transactions: Basis, Gain and Loss, and Nontaxable Exchanges

Question 1

If insurance proceeds are received for property used in a trade or business, a casualty transaction can result in recognized gain, but cannot result in a recognized loss.

Answer 1

False

Question 2

Milton purchases land and a factory building for his business for $300,000 with $100,000 being allocated to the land. During the first year, Milton deducts cost recovery of $4,922. Milton's adjusted basis for the building at the end of the first year is $195,078 ($200,000 - $4,922).

Answer 2

True

Question 3

The amount received for a utility easement on land is included in the gross income of the taxpayer.

Answer 3

False

Question 4

If Wal-Mart stock increases in value during the tax year by $6,000, the amount realized is a positive $6,000.

Question 5

Wade is a salesman for a real estate development company. Because he is the "salesperson of the year," he is permitted to purchase a lot from the developer for $90,000. The fair market value of the lot is $150,000 and the developer's adjusted basis is $100,000. Wade must recognize a gain of $10,000 ($100,000 developer's adjusted basis - $90,000 cost to Wade), and his adjusted basis for the lot is $100,000 ($90,000 cost + $10,000 recognized gain).

Question 6

Reggie owns all the stock of Amethyst, Inc. (adjusted basis of $100,000). If he receives a distribution from Amethyst of $90,000 and corporate earnings and profits are $15,000, Reggie has a capital gain of $5,000 and an adjusted basis for his Amethyst stock of $0.

Question 7

Realized gain or loss is measured by the difference between the amount realized from the sale or other disposition of property and the property's adjusted basis at the date of disposition.

Question 8

If the amount of a corporate distribution is less than the amount of the corporate earnings and profits, the return of capital concept does not apply and the shareholders' adjusted basis for the stock remains unchanged.

Question 9

The adjusted basis for a taxable bond purchased at a premium is reduced if the amortization election is made. The amount of the amortized premium is treated as an interest deduction.

Question 10

If a seller assumes the buyer's liability on the property acquired, the buyer's adjusted basis for the property is increased by the amount of the liability assumed.

Question 11

When a taxpayer has purchased several lots of stock on different dates at different purchase prices and cannot identify the lot of stock that is being sold, he should use either a weighted average approach or a LIFO approach.

Question 12

Helen purchases a $10,000 corporate bond at a premium of $1,000 and elects to amortize the premium. On the later sale of the bond for $10,800, she has amortized $300 of the premium. Helen has a recognized gain of $800 ($10,800 amount realized - $10,000 adjusted basis).

Question 13

A realized gain on the sale or exchange of a personal use asset is recognized, but a realized loss on the sale, exchange, or condemnation of a personal use asset is not recognized.

Question 14

Monroe's delivery truck is damaged in an accident. Monroe's adjusted basis for the delivery truck prior to the accident is $20,000. If Monroe receives insurance proceeds of $21,000 and recognizes a casualty gain of $1,000, his adjusted basis for the delivery truck after the accident is $21,000.

Question 15

The amount of a corporate distribution qualifying for capital recovery treatment which exceeds the shareholder-recipient's basis in the stock investment is treated as a capital gain.

Question 16

Expenditures made for ordinary repairs and maintenance of property are not added to the original basis in the determination of the property's adjusted basis whereas capital expenditures are added to the original basis.

Question 17

The fair market value of property received in a sale or other disposition is the price at which property will change hands between a willing seller and a willing buyer when neither is compelled to sell or buy.

Question 18

In computing the amount realized when the fair market value of the property received cannot be determined, the fair market value of the property surrendered may be used.

Question 19

In a casualty or theft, the basis of property involved is reduced by the amount of insurance proceeds received and by any resulting recognized loss.

Question 20

If the buyer assumes the seller's liability on the property acquired, the seller's amount realized is decreased by the amount of the liability assumed.

Question 21

The holding period for nontaxable stock dividends that are the same type (i.e., common on common) includes the holding period of the original shares, but the holding period for nontaxable stock dividends that are not the same type (i.e., preferred on common) is new and begins on the date the dividend is received.

Question 22

In 1973, Fran received a birthday gift of stock worth $75,000 from her aunt. The aunt had owned the stock (adjusted basis $50,000) for 10 years and paid gift tax of $27,000 on the transfer. Fran's basis in the stock is $75,000-the lesser of $77,000 ($50,000 + $27,000) or $75,000.

Question 23

The basis for depreciation on depreciable gift property received is the donor's adjusted basis of the property at the date of the gift (assuming no gift taxes are paid). The rule applies regardless of whether the fair market value at the date of the gift is greater than or less than the donor's adjusted basis.

Question 24

For the loss disallowance provision under § 267, related parties include certain family members, a shareholder and his or her controlled corporation (i.e., greater than 50% in value of the corporation's outstanding stock), and a partner and his or her controlled partnership (i.e., greater than 50% of the capital interests or profits interest in the partnership).

Question 25

Transactions between related parties that result in disallowed losses might later provide a tax benefit to the related party buyer.

Question 26

Realized losses from the sale or exchange of stock are disallowed if within 30 days before or 30 days after the sale or exchange, the taxpayer acquires substantially identical stock.

Question 27

Lump-sum purchases of land and a building are allocated on the basis of the relative fair market values of the individual assets acquired.

Question 28

If the fair market value of the property on the date of death is greater than on the alternate valuation date, the use of the alternate valuation amount is mandatory.

Question 29

Parker bought a brand new Ferrari on January 1, 2016, for $125,000. Parker was fatally injured in an auto accident on June 23, 2016, when the fair market value of the car was $105,000. Parker was driving a loaner car from the Ferrari dealership while his car was being serviced. In his will, Parker left the Ferrari to his best friend, Ryan. Ryan's holding period for the Ferrari begins on January 1, 2016.

Question 30

If losses are disallowed in a related party transaction, the holding period for the buyer includes the holding period of the seller.

Question 31

The basis of property acquired in a wash sale is its cost plus the loss not recognized on the wash sale.

Question 32

The carryover basis to a donee for property received by gift can be an amount greater than the donor's adjusted basis.

Question 33

The amount of the loss basis of a gift will differ from the amount of the gain basis only if at the date of the gift the adjusted basis of the property exceeds the property's fair market value.

Question 34

If the alternate valuation date is elected by the executor of the estate, the basis of all of the property included in the decedent's estate becomes the fair market value 6 months after the decedent's death.

Question 35

Gene purchased an SUV for $45,000 which he uses 100% for personal purposes. When the SUV is worth $30,000, he contributes it to his business. The gain basis is $45,000, the loss basis is $30,000, and the basis for cost recovery is $45,000.

Question 36

The holding period for property acquired by gift is automatically long term.

Question 37

If the alternate valuation date is elected by the executor in 2016, the total basis of inherited property will be more than what it would have been if the primary valuation date and amount had been used.

Question 38

Ben sells stock (adjusted basis of $25,000) to his son, Ray, for its fair market value of $15,000. Ray gives the stock to his daughter, Trish, who subsequently sells it for $26,000. Ben's recognized loss is $0 and Trish's recognized gain is $1,000 ($26,000 - $15,000 - $10,000).

Question 39

If property that has been converted from personal use to business use has appreciated in value, its basis for gain will be the same as the basis for loss.

Question 40

The basis of inherited property usually is its fair market value on the date of the decedent's death.

Question 41

Steve purchased his home for $500,000. As a sole proprietor, he operates a certified public accounting practice in his home. For this business, he uses one room exclusively and regularly as a home office. In Year 1, $3,042 of depreciation expense on the home office was deducted on his income tax return. In Year 2, Steve sustained losses in his business; therefore, no depreciation was taken on the home office. Had he been allowed to deduct depreciation expense, his depreciation expense would have been $3,175. What is the adjusted basis in the home?

A)$493,783
B)$496,825
C)$496,958
D)$500,000
E)None of the above

Question 42

Yolanda buys a house in the mountains for $450,000 which she uses as her personal vacation home. She builds an additional room on the house for $40,000. She sells the property for $560,000 and pays $28,000 in commissions and $4,000 in legal fees in connection with the sale. What is the recognized gain or loss on the sale of the house?

A)$0
B)$38,000
C)$70,000
D)$110,000
E)None of the above

Question 43

Broker's commissions, legal fees, and points paid by the seller reduce the seller's amount realized.

Question 44

Carlton purchases land for $550,000. He incurs legal fees of $10,000 and broker's commission of $28,000 associated with the purchase. He subsequently incurs additional legal fees of $25,000 in having the land rezoned from agricultural to residential. He subdivides the land and installs streets and sewers at a cost of $800,000. What is Carlton's basis for the land and the improvements?

A)$1,350,000
B)$1,378,000
C)$1,385,000
D)$1,413,000
E)None of the above

Question 45

Katie sells her personal use automobile for $12,000. She purchased the car three years ago for $25,000. What is Katie's recognized gain or loss?

A)$0
B)$12,000
C)($13,000)
D)($25,000)
E)None of the above

Question 46

The basis for gain and loss of personal use property converted to business use is the lower of the adjusted basis or the fair market value on the date of conversion.

Question 47

The taxpayer owns stock with an adjusted basis of $15,000 and a fair market value of $8,000. If the stock or cash is going to be given to her niece, it is preferable for the taxpayer to sell the stock and give the $8,000 of cash to her niece. The same preference would exist if the recipient were a qualified charitable organization.

Question 48

Jason owns Blue Corporation bonds (face value of $10,000), purchased on January 1, 2016, for $11,000. The bonds have an annual interest rate of 8% and a maturity date of December 31, 2025. If Jason elects to amortize the bond premium, what is his taxable interest income for 2016 and the adjusted basis for the bonds at the end of 2016 (assuming straight-line amortization is appropriate)?

A)$800 and $11,000
B)$800 and $10,900
C)$700 and $11,000
D)$700 and $10,900
E)None of the above

Question 49

Abby sells real property for $300,000. The buyer pays $5,000 in property taxes that had accrued during the year while the property was still legally owned by Abby. In addition, Abby pays $15,000 in commissions and $3,000 in legal fees in connection with the sale. How much does Abby realize (the amount realized) from the sale of her property?

A)$277,000
B)$282,000
C)$287,000
D)$300,000
E)None of the above

Question 50

Jamie bought her house in 2008 for $395,000. Since then, she has deducted $70,000 in depreciation associated with her home office and has spent $45,000 replacing all the old pipes and plumbing. She sells the house on July 1, 2016. Her realtor charged $34,700 in commissions. Prior to listing the house with the realtor, she spent $300 advertising in the local newspaper. Sammy buys the house for $500,000 in cash, assumes her mortgage of $194,000, and pays property taxes of $4,200 for the entire year on December 1, 2016. What is Jamie's adjusted basis at the date of the sale and the amount realized?

A)$370,000 adjusted basis; $661,400 amount realized.
B)$370,000 adjusted basis; $661,100 amount realized.
C)$370,000 adjusted basis; $665,200 amount realized.
D)$325,000 adjusted basis; $663,200 amount realized.
E)$325,000 adjusted basis; $694,000 amount realized.

Question 51

Stuart owns land with an adjusted basis of $190,000 and a fair market value of $500,000. If the property is going to be given to Stuart's nephew, Alex, it is preferable for the transfer to be by inheritance rather than by gift.

Question 52

Joyce's office building was destroyed in a fire (adjusted basis of $350,000; fair market value of $400,000). Of the insurance proceeds of $360,000 she receives, Joyce uses $310,000 to purchase additional inventory and invests the remaining $50,000 in short-term certificates of deposit. She received only $360,000 because of a co-insurance clause in her insurance policy. What is Joyce's recognized gain or loss?

A)$0
B)$10,000 loss
C)$10,000 gain
D)$40,000 gain
E)None of the above

Question 53

Alice owns land with an adjusted basis of $610,000, subject to a mortgage of $350,000. Real estate taxes are $9,000 per calendar year and are payable on December 31. On April 1, Alice sells her land subject to the mortgage for $650,000 in cash, a note for $600,000, and property with a fair market value of $120,000. What is the amount realized?

A)$1,370,000
B)$1,372,250
C)$1,720,000
D)$1,722,250
E)None of the above

Question 54

Sandra's automobile, which is used exclusively in her trade or business, was damaged in an accident. The adjusted basis prior to the accident was $11,000. The fair market value before the accident was $10,000 and the fair market value after the accident is $6,000. Insurance proceeds of $3,200 are received. What is Sandra's adjusted basis for the automobile after the casualty?

A)$0
B)$7,000
C)$7,800
D)$10,200
E)None of the above

Question 55

Since wash sales do not apply to gains, it may be desirable to engage in this type of transaction before the end of the tax year.

Question 56

Capital recoveries include:

A)The cost of capital improvements.
B)Ordinary repair and maintenance expenditures.
C)Payments made on the principal of a mortgage on taxpayer's building.
D)Amortization of bond premium.
E)All of the above.

Question 57

Pedro borrowed $250,000 to purchase a machine costing $300,000. He later borrowed an additional $25,000 using the machine as collateral. Both notes are nonrecourse. Eight years later, the machine has an adjusted basis of zero and two outstanding note balances of $145,000 and $18,000. Pedro sells the machine subject to the two liabilities for $45,000. What is his realized gain or loss?

A)$0
B)$45,000
C)$163,000
D)$208,000
E)None of the above

Question 58

Albert purchased a tract of land for $140,000 in 2013 when he heard that a new highway was going to be constructed through the property and that the land would soon be worth $200,000. Highway engineers surveyed the property and indicated that he would probably get $180,000. The highway project was abandoned in 2016 and the value of the land fell to $100,000. What is the amount of loss Albert can claim in 2016?

A)$40,000
B)$60,000
C)$80,000
D)$100,000
E)None of the above

Question 59

On February 1, Karin purchases real estate for $375,000. The annual property taxes of $5,000 are payable on December 31. Realizing that she will pay the property taxes for the entire year, Karin remits $374,575 to the seller at closing. Karin's adjusted basis for the real estate is:

A)$374,583.
B)$375,000.
C)$375,417.
D)$379,583.
E)None of the above.

Question 60

Karen owns City of Richmond bonds with a face value of $10,000. She purchased the bonds on January 1, 2016, for $11,000. The maturity date is December 31, 2025. The annual interest rate is 8%. What is the amount of taxable interest income that Karen should report for 2016, and the adjusted basis for the bonds at the end of 2016, assuming straight-line amortization is appropriate?

A)$0 and $11,000
B)$0 and $10,900
C)$100 and $11,000
D)$100 and $10,900
E)None of the above

Question 61

Kevin purchased 5,000 shares of Purple Corporation stock at $10 per share. Two years later, he receives a 5% common stock dividend. At that time, the common stock of Purple Corporation had a fair market value of $12.50 per share. What is the basis of the Purple Corporation stock, the per share basis, and gain recognized upon receipt of the common stock dividend?

A)$50,000 basis in stock, $10 basis per share for the original stock and $0 basis per share for the dividend shares, $0 recognized gain.
B)$50,000 basis in stock, $9.52 basis per share, $0 recognized gain.
C)$53,125 basis in stock, $10 basis per share for the original stock and $12.50 basis per share for the dividend shares, $3,125 recognized gain.
D)$53,125 basis in stock, $10.12 basis per share, $3,125 recognized gain.
E)None of the above.

Question 62

Ralph gives his daughter, Angela, stock (basis of $8,000; fair market value of $6,000). No gift tax results. If Angela subsequently sells the stock for $10,000, what is her recognized gain or loss?

A)$0
B)$2,000
C)$4,000
D)$10,000
E)None of the above

Question 63

In addition to other gifts, Megan made a gift of stock to Jeri in 1976. Megan had purchased the stock in 1974 for $7,500. At the time of the gift, the stock was worth $20,000. If Megan paid $850 of gift tax on the transaction in 1976, what is Jeri's gain basis for the stock?

A)$7,500
B)$8,350
C)$9,017
D)$20,000
E)None of the above

Question 64

Arthur owns a tract of undeveloped land (adjusted basis of $145,000) which he sells to his son, Ned, for its fair market value of $105,000. What is Arthur's recognized gain or loss and Ned's basis in the land?

A)$0 and $105,000.
B)$0 and $145,000.
C)($40,000) and $105,000.
D)($40,000) and $145,000.
E)None of the above.

Question 65

The holding period of property acquired by gift may begin on:

A)The date the property was acquired by the donor only.
B)The date of gift only.
C)Either the date the property was acquired by the donor or the date of gift.
D)The last day of the tax year in which the property was originally acquired by the donor.
E)None of the above.

Question 66

Shontelle received a gift of income-producing property with an adjusted basis of $49,000 to the donor and fair market value of $35,000 on the date of gift. No gift tax was paid by the donor. Shontelle subsequently sold the property for $31,000. What is the recognized gain or loss?

A)$0
B)($4,000)
C)($10,000)
D)($18,000)
E)None of the above

Question 67

Tobin inherited 100 acres of land on the death of his father in 2016. A Federal estate tax return was filed and the land was valued at $300,000 (its fair market value at the date of the death). The father had originally acquired the land in 1973 for $19,000 and prior to his death had made permanent improvements of $6,000. What is Tobin's basis in the land?

A)$19,000
B)$25,000
C)$300,000
D)$325,000
E)None of the above

Question 68

Nancy gives her niece a crane to use in her business with a fair market value of $61,000 and a basis in Nancy's hands of $80,000. No gift tax was paid. What is the niece's basis for depreciation (cost recovery)?

A)$0
B)$19,000
C)$61,000
D)$80,000
E)None of the above

Question 69

Which of the following is correct?

A)The gain basis for property received by gift is the lesser of the donor's adjusted basis or the fair market value on the date of the gift.
B)The loss basis for property received by gift is the same as the donor's basis.
C)The gain basis for inherited property is the same as the decedent's basis.
D)The loss basis for inherited property is the lesser of the decedent's basis or the fair market value on the date of the decedent's death.
E)None of the above.

Question 70

Paul sells property with an adjusted basis of $45,000 to his daughter Dean, for $38,000. Dean subsequently sells the property to her brother, Preston, for $38,000. Three years later, Preston sells the property to Hun, an unrelated party, for $50,000. What is Preston's recognized gain or loss on the sale of the property to Hun?

A)$0
B)$5,000
C)$12,000
D)($5,000)
E)None of the above

Question 71

Noelle received dining room furniture as a gift from her friend, Jane. Jane's adjusted basis was $9,200 and the fair market value on the date of the gift was $7,000. Noelle decided she did not need the furniture and sold it to a neighbor six months later for $6,500. What is her recognized gain or loss?

A)$0
B)($500)
C)($2,700)
D)$6,500
E)None of the above

Question 72

Nat is a salesman for a real estate developer. His employer permits him to purchase a lot for $75,000. The employer's adjusted basis for the lot is $45,000, and its normal selling price is $90,000.
What is Nat's recognized gain and his basis for the lot?

A)$0 $ 75,000
B)$0 $ 90,000
C)$15,000 $ 75,000
D)$15,000 $ 90,000
E)$30,000 $105,000

Question 73

Over the past 20 years, Alfred has purchased 380 shares of Green, Inc., common stock. His first purchase was in 1994 when he acquired 30 shares for $20 a share. In 2000, Alfred bought 150 shares at $10 a share. In 2015, Alfred acquired 200 shares at $50 a share. Alfred intends to sell 125 shares at $60 per share in the current year (2016). If Alfred's objective is to minimize gain and assuming he can adequately identify the shares to be sold, what is his recognized gain?

A)$1,250
B)$3,520
C)$5,950
D)$6,250
E)None of the above

Question 74

Mona purchased a business from Judah for $1,000,000. Judah's records and an appraiser provided her with the following information regarding the assets purchased:
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What is Mona's adjusted basis for the land, building, and equipment?

A)Land $270,000, building $450,000, equipment $180,000.
B)Land $195,000, building $575,000, equipment $230,000.
C)Land $195,000, building $310,000, equipment $95,000.
D)Land $270,000, building $521,429, equipment $208,571.
E)None of the above.

Question 75

Nontaxable stock dividends result in:

A)A higher cost per share for all shares than before the stock dividend.
B)A lower cost per share for all shares than before the stock dividend.
C)An increase in the total cost of the old and new stock combined.
D)A decrease in the total cost of the old and new stock combined.
E)None of the above.

Question 76

Gift property (disregarding any adjustment for gift tax paid by the donor):

A)Has no basis to the donee because he or she did not pay anything for the property.
B)Has the same basis to the donee as the donor's adjusted basis if the donee disposes of the property at a gain.
C)Has the same basis to the donee as the donor's adjusted basis if the donee disposes of the property at a loss, and the fair market value on the date of gift was less than the donor's adjusted basis.
D)Has no basis to the donee if the fair market value on the date of gift is less than the donor's adjusted basis.
E)None of the above.

Question 77

In 2012, Harold purchased a classic car that he planned to restore for $12,000. However, Harold is too busy to work on the car and he gives it to his daughter Julia in 2016. At this time, the fair market value of the car has declined to $10,000. Harold paid no gift tax on the transaction. Julia completes some of the restoration herself with out-of-pocket costs of $5,000. She later sells the car for $30,000. What is Julia's recognized gain or loss on the sale of the car?

A)$0
B)$13,000
C)$15,000
D)$18,000
E)None of the above

Question 78

Kelly inherits land which had a basis to the decedent of $95,000 and a fair market value of $50,000 on August 4, 2016, the date of the decedent's death. The executor distributes the land to Kelly on November 12, 2016, at which time the fair market value is $49,000. The fair market value on February 4, 2017, is $45,000. In filing the estate tax return, the executor elects the alternate valuation date. Kelly sells the land on June 10, 2017, for $48,000. What is her recognized gain or loss?

A)($1,000)
B)($2,000)
C)($47,000)
D)$1,000
E)None of the above

Question 79

Taylor inherited 100 acres of land on the death of his father in 2016. A Federal estate tax return was filed and this land was valued therein at $650,000, its fair market value at the date of the father's death. The father had originally acquired the land in 1970 for $112,000 and prior to his death he had expended $20,000 on permanent improvements. Determine Taylor's holding period for the land.

A)Will begin with the date his father acquired the property.
B)Will automatically be long-term.
C)Will begin with the date of his father's death.
D)Will begin with the date the property is distributed to him.
E)None of the above.

Question 80

Mary sells her personal use automobile for $20,000. She purchased the car two years ago for $17,000. What is Mary's recognized gain or loss? It increased in value due to its excellent mileage, yet safe design.

A)$0
B)$3,000
C)$17,000
D)$20,000
E)None of the above